October 25, 2013

PITTSBURGH — Some of the largest pension funds in the U.S. and the world are worried that major fossil fuel companies may not be as profitable in the future because of efforts to limit climate change, and they want details on how the firms will manage a long-term shift to cleaner energy sources.

In a statement released Thursday, leaders of 70 funds said they’re asking 45 of the world’s top oil, gas, coal and electric power companies to do detailed assessments of how efforts to control climate change could impact their businesses.

“Institutional investors must think over the long term, which means that we must take environmental risks into consideration when we make investments,” New York State Comptroller Thomas DiNapoli told The Associated Press in a statement. The state’s Common Retirement Fund manages almost $161 billion of investments.

Fossil fuels currently provide about 80 percent of all the energy used in the world. The pension funds say that because it takes decades to recoup the huge investments required for fossil fuel exploration, there’s a significant chance that future regulations will limit production or impose expensive pollution-control requirements that would reduce the fuels’ profitability.

Others signers of the letter include the comptrollers or treasurers of California, New York City, Maryland, Oregon, Vermont and Connecticut, as well as The Church of England Pensions Board, the Scottish Widows Investment Partnership, the investment firm Rockefeller & Co. and dozens of other funds that control a total of about $3 trillion. Only a fraction of that is with fossil fuel companies, however.

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The American Petroleum Institute, which represents the industry, was examining the statement and did not immediately comment.

Big money quote:

“The scientific trajectory that we’re on is clearly in conflict” with the business strategy of the companies, Ehnes added, referring to the overwhelming consensus among top scientists from around the world that global warming is a man-made threat, that pollution from fossil fuels is the biggest problem and that many of the already-discovered fossil fuel reserves will need to stay in the ground to avoid extreme climate change.”

The investors asked the companies to carry out the risk assessment in time for their 2014 annual meetings, generally in the first half of next year, and to publish details about their conclusions, subject to the constraints of commercial confidentiality.

About 30 companies have now replied to the letter, Ceres said, some rejecting the idea outright, some saying they planned to comply with the request and most saying they would consider the proposal.

Andrew Logan of Ceres, the investor network that works on environmental and social issues, which co-ordinated the letter, said: “Investors have already been burned by coal, because of the sudden drop in demand in the US, and there’s a concern that oil is going to go the same way.”

Mainstream forecasts of energy demand put out by government agencies, oil companies and consultancies still point to sustained growth in global demand for fossil fuels, including coal and oil, driven by emerging economies.

Mr Logan said: “We’re not necessarily predicting the future. But there are credible scenarios people have put forward that raise questions about the energy industry’s business model, and whether the pace of its capital spending makes sense, given those future prospects.”

HSBC has estimated that in a world where carbon emissions were constrained, oil and gas companies could lose 40-60 per cent of their market capitalisation.

The International Energy Agency, the rich countries’ think-tank, has said only one-third of the world’s proved reserves of fossil fuels can be used by 2050 if the world is to stay within the 2-degree limit, unless there is widespread use of carbon capture technology.

“Long-dated bonds of fossil fuel companies, some with maturities extending decades into the future, could readily become toxic financial assets as the credit quality of their issuers deteriorate in reaction to belated market responses to the harsh reality of stranded asset risk and systemic climate risk,” warns Joshua Humphreys of the Tellus Institute.

Market responses could include a carbon tax that will increase the price of fossil fuels and concurrently incentivize renewable energy investments. According to some estimates, average carbon prices could be more than $100 per metric ton if the full lifecycle costs of carbon were assessed properly.

This isn’t just a viewpoint that small institutional investors are espousing. Groups as diverse as Shell, Mercer, HSBC, prominent insurance companies and re-issuers, Standard & Poor’s and the InternationalEnergyAgency have been giving clear warning signs about continuing to invest in fossil fuels. Experts leading the divestment conversation have different suggestions for pathways to fossil fuel divestment
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For investors concerned about risk: Aperio Group’s report, “Building A Carbon Free Portfolio” has calculated that eliminating fossil fuel energy firms (as few as the top 15 to as much as the entire fossil fuel production industry) does not create a significant potential penalty of theoretical return.

This report demonstrates the low risk of removing fossil fuels from portfolios, which combined with the high (and increasing) risks of holding onto fossil fuel investments makes a very compelling case that fossil fuel divestment can be a safe and effective action.

The first involves freezing fossil fuel investments in the 200 largest fossil fuel companies (measured by proven carbon reserves in oil, gas or coal). The second step builds on the first and reinvesting a minimum of 5% of the portfolio in fossil-free investments. The third and final pathway involves divestment and then strategic reallocation across all asset classes to manage climate risk and embrace sustainable investment opportunities.

In an interview about the economic impact of climate change, Al Gore has warned that individuals, investment funds, and institutions should divest from fossil fuel companies before the great “carbon bubble” bursts in world financial markets. Gore maintains that the largest risk ever to the financial markets is now global climate change.
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Gore explains that, “There are $7 trillion worth carbon assets on the books of multinational energy companies today. There are another $14 trillion owned by sovereigns like governments in the Persian Gulf region. But just to take the public companies; the valuation of those companies and their assets is now based on the assumption that all of those carbon assets are going to be sold and burned. And they are not. The global scientific community has just reaffirmed that no more than one-third can ever possibly be burned without destroying the future.”

Gore likens these fossil fuel assets to sub-prime mortgages, saying “these are sub-prime carbon assets”. He explains that sub-prime mortgages had an artificial value based on the assumption that people who couldn’t make a downpayment on a mortgage would never default on their loans. The institutions selling them operated on the assumption that selling them on would magically eliminate the risk involved, at least for them. It was a self-serving illusion. Eventually, when the assets were examined more closely, it resulted in them being “suddenly and massively repriced, and that’s what triggered the global credit crisis, and detonated the Great Recession”.

For more discussion, see Al Gore’s interview at the link above or here. Yahoo wouldn’t let me upload or embed.

Then catch a counter argument from the very smart, not-a-denialist Dan Dicker, who is more pessimistic. I’m going to say I’m not sure Dan is as clued in to the magnitude of the changes we are seeing in the renewable sector as Gore is.
Stay tuned.

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Ans: Over time we’ll install an enormous number of decentralized compact nuclear reactors. Every NFL city (metropolitan area) will use 30-50 of them (each will be the size of a 3000 sq. ft. two-story home and can be made cosmetically indistinguishable from a residential home). Some will be the Traveling Wave Type burning U238 (100X more abundant than U235) . Others will be thorium based (a yet more abundant fuel). In both cases byproducts of the process will be hugely minimized with no possibility of bomb-grade byproduct.

Eventually the grid will operate in reverse (carrying excess power from these decentralized locations to accumulate it into centralized locations) as these compact sources will want to run at 100% capacity. Locations of centralized power generation today will migrate to become locations of centralized industrial consumption.

And eventually these compact sources will become miniaturized enough to address the transportation sector.

Wind and solar will be museum pieces and relics to remind us of prior foolishness.

Fossil fuel will have its small-scale applications indefinitely (chain saws and weed whackers and the like).

No one will ever concern themselves with energy conservation as the known fuel for this robust decentralized system can power it globally for 10,000 years.

I own a closed end fund security that once was deriving 80%+ of its money from mortgage related stuff, but during the financial crisis and housing bubble, it reinvented itself as an entity that held a lot of utility derived stuff (bonds, preferred shares, etc.). Last i looked at the SEC filings, it was downsizing its utility based stuff and going back into more financially related stuff.

Now maybe that’s what the managers are expert at: the financially related stuff (financial sector related stuff), rather than utility related stuff, but even so, it’s notable that even with all the headwinds out there (QE taper, still lots of pain to be had in the housing market, etc.) these guys are more comfortable haunting the former, whilst shunning the latter; a traditional pinnacle of stability (which may be no more here in 5, 10, 15 years).

The solutions you favor are failing for very predictable reason. The solutions I’m speaking to are in-the-works and will very much more likely prevail.

Some of your ilk might have a us return to caves. This proposition is outrageously premature at its ridiculously best and most likely entirely wrong, even as these extremes are presented metaphorically. We don’t need to contract, we rather need to concern ourselves with the continual growth that this universe will essentially infinitely provide.

Somewhat in to opposition to your thinking:

I say that all mater is frozen energy and we’re only starting to explore this obvious and, by our standards, essentially infinite fact.

- The costs of mass manufacturing SMRs would be offset by loss of economies of scale.

– Spent fuel management for SMRs would be more complex, and therefore more expensive, because the waste would be located at many more sites.

Meanwhile, efficiency and cleaner, safer, ubiquitous renewable energy technologies are already cheaper than new reactors and growing more so, even as renewable energy (much of which is based on materials science) is advancing technologically at amazing rates.

Also, nuclear research is notoriously expensive while renewable energy research is incredibly cheap. …. See you in the marketplace

Traveling Wave and Thorium Reactors burn 10-100X more efficiently than current U235 reactors resulting in much less (and less toxic) waste.

The vision for the future of these modular reactors is that they are installed with 30+ years of fuel that is replaced every 30 years.

By the time these reactors are miniaturized enough to address transportation needs you’ll be able to go into Home Depot and buy a refrigerator-sized power source that will power your individual home for 30 years. At the end of life the unit is replaced. And no matter how many units are collected and disassembled (new or used) there will be no bomb-grade material that could ever be recovered.

You should look more carefully at your renewable claims. There are scant moments (when the winds are perfect or the sun is directly overhead on a clear day) when, during these moments, wind and solar appear competitive. All the rest of the time, and certainly on average, they are not. If they were competitive, and they’re not, we would drop all the subsidies as the market would buy them vigorously.

No such reactors currently exists on a commercial scale. Nor are they likely to exist in the near to mid term future. No one knows how much they would cost to build, operate, regulate or decommission if they did exist.

“The vision for the future of these modular reactors…”

Visions are wonderful things aren’t they. Anything can happen in a vision.

“…you’ll be able to go into Home Depot and buy a refrigerator-sized power source that will power your individual home for 30 years.”

Will I be able to pick up a flux capacitor too?

“You should look more carefully at your renewable claims.”

No, that’s what you should do. Only read articles from 2012 onward. Solar catalysis, artificial photosynthesis and nano materials based storage solutions are the keys. These mean that solar technology is no more affected by intermittent nature of sunlight than plant life is. It is obvious you dishonestly wish to direct our gaze at the renewable technologies from yesterday, while pointing to the nonexistent nuclear technology of tomorrow

You criticize my vision and substitute your own vision (one that requires multiple magical flux-capacitors). Time will tell. We can respectfully agree to disagree.

Your curious comment “These mean that solar technology is no more affected by intermittent nature of sunlight than plant life is”. The last time I looked, plant life seemed to be affected by the intermittent nature of sunlight.

I’ve spent a career in semiconductor manufacturing technologies and recently at the nanoscale. Without at all invoking authority, three-layer 42% efficient solar panels currently cost >$100,000/sq.-meter. And the life expectancy of solar panels is routinely exaggerated. It remains entirely unclear that any solar panel technology, yet produced, can return over it’s life, more energy than was required to fabricate, install and maintain.

I dishonestly…
Think again. And please be respectful. I’ve watched the steady baby steps of wind, solar and battery technologies for 35 years. Miracles can and do happen, but wind/solar require compounded miracles.

— It will indeed. However, the momentum, the money and the politics are all on the side of renenewables

“Your curious comment “These mean that solar technology is no more affected by intermittent nature of sunlight than plant life is”. The last time I looked, plant life seemed to be affected by the intermittent nature of sunlight.”

— The cost of an Intel Pentium was originally very high… And then it fell like a rock when the next better chip came out. Solar technology is acting very much like computer chip tech – the price halving ever two years or so. These iterative (version based) technologies are advancing at a rate nuclear can only dream of. The price of nuclear has, in fact, risen over the same time frame.

“And the life expectancy of solar panels is routinely exaggerated.”

— Most manufacturers currently guarantee their solar panels for 25 years. This is rising Estimates of probable cell lifespans continue to increase as the technology advances. Self healing materials could allow solar cells to last INDEFINITELY.

— Irrelevant. Advances in solar technology are following a classic exponential J Curve. You could have watched human population growth for thousands of years – but you would not have been able to concluded from that that human populations would not explode as they did in the twentieth century

“Miracles can and do happen, but wind/solar require compounded miracles.”

— Be specific. Please describe the nature of these “compounded miracles” that are required for solar?

Caves? What if my neighbor gets in a fight with his wife? A new definition of going nuclear. But there are benefits. I wouldn’t have to heat my home or shovel snow in Alaska if lived next to a nuke. Of course, all of us citizen militia would guard our precious reactors against attack with our NRA rifles. What could go wrong? Matter is frozen energy. I have not heard such brilliance since Einstein e=mc2. Maybe I can still get to the patent office before somebody invents the nuclear lawnmower. Anybody for a slightly used nuclear aircraft?http://www.aviastar.org/air/usa/convair_nb-36.php